Bankruptcy is a state of personal insolvency where an individual can’t pay back their unsecured debts worth more than £5,000. It isn’t the only debt relief option, and other methods are available when it comes to individuals finding themselves in a difficult financial position.

After a bankruptcy taken place and the appointed Trustee has closed their file, your creditors will write off your unsecured debts. This allows you to make a fresh start. Bankruptcy usually lasts for 12 months, and you’ll have many financial restrictions during this period. After this 12-month period, you’ll usually be ‘discharged’ from it.

When am I considered bankrupt?

There are typically two ways of identifying if you are bankrupt or not

• If you are unable to pay your bills as and when they fall due and you are not able to meet your monthly requirements, you could be considered bankrupt.
• If your outstanding liabilities outweigh the value of your assets, then you might also be considered bankrupt.

There has to be some caution taken with these two definitions of being bankrupt, as you may be waiting on a paycheque to pay your bills, or your liabilities might only temporarily outweigh the value of your assets, making you temporarily insolvent.

The process of bankruptcy is available to sole traders and individuals and is a way of managing and writing off your debts.

What will happen to your home in bankruptcy?

If you enter into bankruptcy and own a property, there is the possibility of your trustee in bankruptcy realising your home in order to repay your creditors. However, the trustee will only be interested in the property if it’s either owned completely or partly by the bankrupt and there is equity available. If it’s believed that the amount of equity in the property is large enough to enable a payment to be made to the creditors, the Trustee can enable a dividend from the asset in question.

What if my home has dual ownership?

If you co-own a property with someone, the trustee in bankruptcy will only be entitled to the bankrupt individual’s share of the equity in the property. This could mean that the house is forcibly sold, or the co-owner of the property could buy the bankrupt share.

You can sell and share the sale proceeds as per the terms set down in their joint ownership agreement, or they can buy the share of the bankrupt owner and pay the trustee.

How to protect yourself from bankruptcy and save your home

If your unsecured debts are impacting your life and you’re looking for a way to ease pressure from your creditors, contact us. We can advise you on how to proceed and what the best option would be going forward, with no obligation.

Individual Voluntary Arrangements (IVA)

An IVA is an arrangement between you and your creditors, which allows you to repay your debts in one affordable, monthly sum. This amount is distributed to your unsecured creditors, e.g., store cards or self-employed business debts on a pro-rata basis. The arrangement usually lasts five years, and once the arrangement concludes, the debts that are still unpaid are written off.

Most importantly, by going through the process of an IVA, you may be able to protect your major assets, such as a house.

Benefits of an IVA

There are some key benefits of an IVA over bankruptcy:

• IVA proposals are created based upon what is affordable to the debtor, alleviating multiple unaffordable creditor repayments.
• You can often retain your home through an IVA. Mortgage repayments are also factored into a person’s outgoings when determining the affordability of IVA repayments.
• The costs of an IVA are usually lower than the costs of bankruptcy, meaning that there may be more funds available for the creditors, and thus they may be satisfied with the outcome available without dealing with the equity in the home.

An IVA avoids some of the restrictions that are associated with bankruptcy, such as being a company director. Unlike in bankruptcy, an IVA can be structured in a way that keeps your home and personal assets out of the arrangement, so long as you keep up with the repayments. This is undoubtedly the major advantage of an IVA.

Summary

Bankruptcy is a state of personal insolvency where an individual can’t pay back their unsecured debts worth more than £5,000. It isn’t the only debt relief option, and other methods are available. While it may be considered a last resort when those other solutions aren’t viable or have failed, it can be the most suitable solution for some. Large personal assets or belongings such as property could be forcibly sold to raise money for your creditors, even if they’re jointly owned.

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